Handbook on Liquidation

7/30/2019 Handbook on Liquidation

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Part 1: An Overview of the Liquidation/Insolvency Process

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When a person, partnership, association, corporation or other legalentity (debtor) can no longer pay its debts as they come due and when

rehabilitation is not a feasible option, the usual remedy is the institution ofinsolvency proceedings and the consequent liquidation of the estate of theinsolvent debtor. In insolvency proceedings, the assets of the debtor aresold and the proceeds are used to pay creditors in the manner and orderestablished by law. An Assignee1 is responsible for the day-to-dayimplementation of the process. These activities, however, occur under thesupervision of the Regional Trial Court, to whom the Assignee reports asan officer of the court. So, while the technical and legal aspects ofliquidation in insolvency are undertaken by persons knowledgeable ininsolvency, it is the court that bears ultimate responsibility for thedecisions made in insolvency proceedings. The court will thus need to be

familiar with the insolvency and liquidation process in order to fairly andefficiently oversee the assignee and to resolve disputes that might ariseduring the proceedings.

To better understand the concepts, principles, rules and regulationsconcerning insolvency, it is best to know first how estates are liquidated inan insolvency proceeding.

Liquidation in Practical Terms

Collection of Assets

The first step in a liquidation procedure under insolvency involvesthe identification and collection of the assets of the insolvent debtor. Theassignee must first locate and identify the assets and rights that may besold or otherwise disposed of (and in the case of rights, enforced) for thebenefit of creditors. This bundle of rights and property is often timesreferred to as the bankruptcy estate. J ust like in testate or intestatesuccession, this is the estate that will be eventually distributed to thecreditors. The assignee needs to gather, manage and preserve the assetsof the insolvent debtor in liquidation, so that the value of the estate (when

eventually sold off) is maximized.

An activity related to the gathering of assets is the recapture ofantecedent transfers or avoidance of pre-commencement transactionsand transfers discussed below. The end result is, likewise, maximization

1 Also known as Liquidator. The two terms are used here interchangeably.


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of the value of the assets for the benefit of creditors and other claimantsas a whole.

Determination of Liabilities/Claims

Once the assets have been identified and verified, the assigneemust then identify, verify and process the liabilities of, or claims against,the estate. It is his duty to ensure that only valid and duly supportedclaims listed in the Schedule of Debts and Liabilities be admitted.Doubtful or unsupported claims, or those that arise from fraudulent orgrossly disadvantageous transactions must be disputed or nullified. In theprocess of verifying claims, he will have to classify and rank creditors inaccordance with the rules on Concurrence and Preference of Credits,preparatory to the distribution of the proceeds of liquidation.

Again, to the extent that questionable claims are deleted from theSchedule of Liabilities, the end result of the identification, verification andprocessing of claims, is the eventual maximization of the value of theassets available to legitimate claimants.

Conversion/Selling of Assets

Having taken into account the debtors assets and liabilities, theassignee will next proceed to the selling of the assets, preparatory to thedistribution of the proceeds of liquidation.2 In selling the assets, theassignee must follow a transparent procedure that will serve to maximizethe value of the assets being sold.

Distribution of the Proceeds of Liquidation

Finally, the assignee must distribute the proceeds from the disposal(or conversion) of assets in accordance with applicable law. This usuallymeans the payment of different classes of creditors according to a pre-established hierarchy. Respect for this hierarchy is an important factor inencouraging banks or other lenders to provide funding for businessdevelopment. As noted by a recent survey of international best practicesin liquidation proceedings:

2 It is possible that, under certain circumstances, assets may be distributed in kind tocreditors.


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[T]o the extent that the distribution priorities following liquidationrecognized the seniority established by contractual terms,creditors will feel confident that they are able to manage, at leastto some degree, the risks that they incur when making investmentdecisions.3

In other words, the more lenders and other investors can rely onpredictable insolvency/liquidation procedures, the more likely they are tolend money at affordable interest rates.

3 International Monetary Fund, Orderly and Effective Insolvency Procedures: Key Issues(Draft Version, May 1999)(hereinafter Insolvency Procedures) at p. 10.


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Part 2: Liquidation Proceedings under the Insolvency Law

The court-supervised liquidation process discussed in Part 1 isgoverned primarily by the Insolvency Law (Act No. 1956), which was

enacted in 1909.

Several factors make application of the Insolvency Law particularlychallenging. First, it is an old law based on Spanish and Americanlegislation dating from the late 19th century. Both the economy and thecourts infrastructure have changed significantly in the meantime, raisingquestions about how it can be applied in the modern day. Second, it wasprimarily written with individuals in mind, rather than the large corporationsthat often come under insolvency proceedings. Third, the Insolvency Lawneeds to be read in tandem with the Civil Codes provisions onconcurrence and preference of credits as well as several Supreme Court

decisions that have affected the laws application.

Initiation of Voluntary Insolvency Proceedings

The Debtors Petition

A debtor may initiate voluntary insolvency proceedings by filing apetition in the Regional Trial Court where it is located during the prior sixmonths.4 The requirements for initiating the proceedings are notparticularly taxing. The debtor need only plead (1) a debt in excess of one

thousand pesos, (2) its inability to pay all its debts in full, and (3) itswillingness to surrender all its property not exempt from execution for thebenefit of its creditors.5 As part of its petition, the debtor must includedetailed information regarding its assets and liabilities.6

For reference, see Sample Form 1 (Petition for Voluntary Insolvency).

Adjudication of Insolvency

If the court finds the petition for voluntary insolvency sufficient in

form and substance, it issues an Order declaring the Petitioner insolvent.The said Order:

4 Insolvency Law, Sec. 14.5Ibid.6Ibid., Secs. 15 and 16.


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Directs the sheriff to take possession of, and safely keep, untilthe appointment of a receiver or assignee, all the deeds,vouchers, books of account, papers, notes, bonds, bills, andsecurities of the debtor and all his real and personal property,

estate, and effects, except such as may be by law exempt fromexecution;

Forbids the payment to the debtor of any debts due to him andthe delivery to the debtor, or any person for him, of any propertybelonging to him, and the transfer of any property by him;

Appoints a time and place for a meeting of creditors to choose anassignee of the estate, which shall be within two (2) to eight (8)weeks from the date of said Order;

Designates a newspaper of general circulation published in theprovince or city in which the Petition is filed, which in the opinionof the judge will best give notice to the creditors of the insolvent;and

Orders the stay of all civil proceedings pending against (the)insolvent.7

For reference, see Sample Form 2 (Order Declaring a DebtorInsolvent).

The Order declaring a debtor insolvent is immediately published bythe clerk of court in the newspaper designated therein, for the number oftimes and as prescribed by the court.8 In addition, a copy of the sameOrder must be delivered personally or sent by registered mail, postageprepaid, to all creditors named in the Schedule of Debts and Liabilitiesattached to the petition.

As illustrated below, this process is relatively straightforward.

7Ibid., Sec. 18.8Ibid., Sec. 19.

Filing of

Petition

Order of

adjudication


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Initiation of Involuntary Insolvency Proceedings

Jurisdictional and Documentary Requirements for the Petition

As its name implies, petitions for involuntary insolvency are notinitiated by a debtor but by creditors interested in satisfying their claimsagainst the debtor. A petition for involuntary insolvency, however, is notlike an ordinary collection suit. It involves not only the petitioning creditorsand the respondent debtor, but also the other creditors who are not partyto the petition. This is consistent with the goal of bankruptcy to create acollective proceeding where all the creditors and other legitimatestakeholders may be treated in a fair and predictable manner.

The law requires petitions for involuntary insolvency to be filed by atleast three (3) creditors, all residents of the Philippines, whose credits or

demands accrued in the Philippines amount to at least One ThousandPesos (P1,000.00).9 The law also requires that the petitioning creditorsstate and prove at least one (1) of the acts of insolvency mentioned in thelaw as a ground for the declaration of insolvency of a respondent debtor(see following section).10

For reference, see Sample Form 3 (Petition for InvoluntaryInsolvency).

Grounds for Petition for Involuntary Insolvency

Section 20 of the Insolvency Law itself lays down the following actsof insolvency that are considered as grounds for creditors to file petitionsfor involuntary insolvency against their debtor:

The debtor is about to depart or has departed from thePhilippines, with intent to defraud creditors;

Being absent from the Philippines, with intent to defraud hiscreditors, he remains absent;

The debtor conceals himself to avoid the service of legal processfor the purpose of hindering or delaying or defrauding hiscreditors;

9Ibid., Sec. 20. This extremely low threshold is but one example of how time and eventshave overtaken the law since its passage in 1909.10Ibid.


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The debtor conceals, or is removing, any of his property to avoidits being attached or taken on legal process;

The debtor has suffered his property to remain under attachment

or legal process for three (3) days for the purpose of hindering ordelaying or defrauding his creditors;

The debtor has confessed or offered to allow judgment in favor ofany creditor or claimant for the purpose of hindering, delaying ordefrauding any creditor or claimant;

The debtor has willfully suffered judgment to be taken againsthim by default for the purpose of hindering or delaying ordefrauding his creditors;

The debtor has suffered or procured his property to be taken onlegal process with intent to give preference to one or more of hiscreditors and thereby hinder, delay, or defraud any one of hiscreditors;

The debtor has made an assignment, gift, sale, conveyance, ortransfer of his estate, property, rights, or credits with intent todelay, defraud or hinder his creditors;

In contemplation of insolvency, [the debtor] made any payment,gift, grant, sale, conveyance, or transfer of his estate, property,

rights, or credits;

Being a merchant or tradesman, [the debtor] has generallydefaulted in the payment of his current obligations for a period ofthirty (30) days;

For a period of thirty (30) days, [the debtor] has failed, afterdemand, to pay any moneys deposited with him or received byhim in a fiduciary capacity; and

An execution having been issued against him on final judgment

for money, [the debtor] shall have been found to be withoutsufficient property subject to execution to satisfy judgment.

Relatedly, the debtors filing of a Petition for Voluntary Insolvency isalso considered as an act of insolvency under Section 14 of theInsolvency Law.


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Documentary Requirements

The law further requires that the Petition for Involuntary Insolvencyshould contain a verification by at least three (3) of the petitioning creditors

and it should be accompanied by a bond, approved by the court, with atleast two (2) sureties.conditioned that if the petition in insolvency bedismissed by the court or withdrawn by the petitioners, or if the debtorshall not be declared an insolvent, the petitioners will pay to thedebtor.all costs, expenses, and damages occasioned by theproceedings.(plus) reasonable counsel fee to be fixed by the court.11

Issuance of Show Cause Order to Debtor

Upon the filing of the Petition for Involuntary Insolvency, the courtshall issue an Order requiring the debtor to show cause, at a time andplace to be fixed in the Order, why he should not be adjudged aninsolvent.12

For reference, see Sample Forms 4 (Order Giving Due Course to aPetition for Involuntary Insolvency and requiring the debtor to show causeas to why it should not be declared insolvent).

Service of Show Cause Order to Debtor by Publication

Service of the show cause order on the debtor is generallygoverned by the rules of service of summons in civil actions. However, adebtor may be served the show cause order via publication if the creditorcan demonstrate that the debtor:

resides out of the Philippines;

has departed from the Philippines;

cannot, after due diligence, be found within the Philippines;

or conceals himself to avoid service of the order to show cause; or



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is a foreign corporation without a local representative upon whomservice can be made.13

For reference, see Sample Forms 5 and 6 (Motion for Service of

the Order by Publication and a sample Order Granting the said motion).

Filing of Answer by Respondent Debtor

At the time fixed for the hearing of the said order to show cause x xx, the debtor must answer the petition, or may demur for the same causesas are provided for under the (Rules on) Civil Procedure. If he demursand the demurrer (is) overruled, the (respondent) debtor shall immediatelyanswer the petition. The answer shall contain a specific denial of thematerial allegations of the petition controverted by him and (the) answer

shall be sworn to.

14

For reference, see Answer that may be filed by the respondentdebtor relative to a Petition for Involuntary Insolvency (Sample Form 9).

If the debtor fails to file an answer, the court shall issue an order ofadjudication and proceed to liquidate his estate.

Issuance of Order Forbidding Certain Transactions

This is a form of preliminary relief. Upon issuance of the showcause order, for good cause shown, or thereafter, i.e., after trial on thepetition, the court may issue another Order forbidding the payment of anydebts, and the delivery of any property belonging to such debtor to him orto any other person for his use or benefit or the transfer of any property by him.15

Determination of Insolvency

If after hearing, the issues are found in favor of the respondentdebtor, the proceedings shall be dismissed, and the respondent shall be

allowed all costs, expenses, counsels fees and damages.

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13Ibid., Sec. 26.14Ibid., Sec. 23.15Ibid., Sec. 21.16Ibid., Sec. 23


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If the respondent debtor shall make default, or if, after trial, theissues are found in favor of the petitioning (creditors), the court shall makean order adjudging that the said respondent is and was, at the time offiling of the petition, an insolvent debtor and that the debtor was guilty of

the acts and things charged in the petition.17

The Order must alsocontain various directives and mandates for safeguarding the property(including a stay order).18 In addition to the directives and mandates in anorder recognizing a debtor insolvent pursuant to a voluntary petition, theOrder resulting from an involuntary petition must direct the debtor tosubmit a Schedule of Liabilities and Inventory of Assets.19 For reference,see Sample Form 10 (Order Adjudging the Debtor as Insolvent).

The order should be published and served in a manner similar tothat for orders resulting from voluntary petitions.

These procedures are diagrammed below.

Interim Measures Pending Election of an Assignee

Sheriffs Takeover of the Assets of Respondent Debtor

If an assignee has not yet been elected or appointed and the

debtor resides out of the Philippines x x x, or has departed from thePhilippine x x x, or cannot, after due diligence, be found within the

17Ibid., Sec. 2418Ibid.19Ibid.

Findings

forcreditors

Findings for debtor

Granted

Not granted

Filing of Petition Order to Show Cause

No answer Demur Answer Trial on the Merits

Dismissal Order of Adjudication


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Philippines x x x, or conceals himself to avoid service of the order toshow cause x x x, or is a foreign corporation without a localrepresentative x x x (the court), upon the petitioning creditors submissionof the affidavits requisite to procure an order of publication, and

presenting a bond in double the amount of the aggregate sum of theirclaims against the debtor, shall direct the sheriff to take into his custodya sufficient amount of property of the debtor to satisfy the demands of thepetitioning creditors and the costs of the proceedings.20

For reference, see Sample Forms 7 and 8 (motion requesting thesheriffs take over of the assets of the insolvent debtor, and order grantingthe same).

Under such an order, the sheriff must

X x x take possession of the property and effects of the debtor, notexempt from execution, to an extent sufficient to cover the amountprovided for, and to prepare, within three days from the time of takingsuch possession, a complete inventory of all the property so taken, andto return it to the court as soon as completed.

It shall also be the duty of the sheriff to prepare a schedule of thenames and residences of the creditors, the amount due each, (based on)the books of the debtor, or from such other papers or data of the debtoravailable as may come to his possession, and he shall file suchinformation with the clerk of court.21

Sale of Some Assets by Sheriff

The Insolvency Law contemplates the possibility of a sale of theassets that have been seized by the sheriff prior to the appointment of anassignee. If the petitioners shall make it appear satisfactorily to the courtor a judge thereof that the interest of the parties to the proceedings will besubserved by a sale [of the assets in the custody of the sheriff], the courtmay order such property to be sold in the same manner as property is soldunder execution, the proceeds thereof to be deposited in the court toabide the result of the proceedings.22

20Ibid., Sec. 2621Ibid.22Ibid., Sec. 28.


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To be entitled to this relief, the petitioning creditors in this casemust have been granted an order for service by publication and orderallowing the seizure of the debtors property under sections 26 and 27(respectively) of the Insolvency Law. The sale of agricultural products that

are at risk of spoiling would be an example of the types of assets thatwould be sold under these circumstances.

Perishable property may likewise be sold prior to theelection/appointment of an assignee under Section 40 of the InsolvencyLaw. See discussion in this part under Disposal of Debtors Property.

Temporary Appointment of a Receiver

At any time before the election of an assignee, when it appears by

the verified petition of a creditor that the assets of the insolvent, or aconsiderable portion thereof, have been pledged, mortgaged, transferred,assigned, conveyed, or seized, on legal process, in contravention orviolation of the Insolvency Law, and that it is necessary to recover thesame, the court may appoint a receiver. The receiver serves untilappointment of the assignee.23

For reference, see Sample Forms 11 and 12 (Petition for theAppointment of Receiver and the corresponding order giving due coursethereto).

Election/Appointment of an Assignee

After the mailing of the order adjudicating the insolvency of thedebtor (whether via voluntary or involuntary petition) and the setting of themeeting of creditors, the time is ripe for the election of the assignee.

Only creditors who filed their claim at least two (2) days prior to thedate of election shall be qualified to vote. The claim shall contain astatement showing the amount and nature of the claim and security, ifany, the same to be verified by the claimant, or his duly authorized agent

or attorney.

24

Exceptions (oppositions) to claims may be filed at least one (1) dayprior to the date of election of an assignee by any person interested in the



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Court Appointment of Assignee

If there is a failure of election, because the creditors failed to attendthe hearing when the election was scheduled, or because the creditors fail

or refuse to elect an assignee, the court may appoint one on its own.28

The court may also appoint an assignee if the chosen assignee fails toqualify within the proper time, resigns, dies or becomes incapacitated toperform his functions.29 The court may also discharge motu propio anassignee who fails, neglects or refuses to discharge his duties andfunctions, and appoint one in his place. 30

For reference, see Sample Forms 17 and 18 (an Order for theappointment of an assignee (a) in case of failure of election and (b) incase of disqualification of the assignee).

The following are the legal effects of the election or appointment ofan assignee in insolvency:

The election/appointment vests in the assignee all of the estate ofthe insolvent debtor not exempt by law from execution (Section32).

It shall also dissolve any attachment levied within one (1) monthnext preceding the commencement of the insolvency proceedingsand vacate and set aside any judgment entered in any actioncommenced within thirty (30) days immediately prior to the

commencement of insolvency proceedings and shall vacate andset aside any execution issued thereon and shall vacate and setaside any judgment entered by default or consent of the debtorwithin 30 days immediately prior to the commencement of theinsolvency proceedings. (Section 32).

The assignee shall have the right to recover all the assets of theestate (Sections 33, 36(5) and 36(8)). A certified copy of theassignment (to the assignee) shall be conclusive evidence of hisauthority to sue or defend (Section 33).

28Ibid., Sec. 31.29Ibid.30Ibid., Sec. 46.


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The assignee has both the right and duty to register theassignment of property to him within one (1) month after themaking of the assignment to him (Section 34).

The assignee shall also have the right to file an action forembezzlement or concealment against any person who, withreason to believe that insolvency proceedings are about to becommenced, embezzles, conceals or disposes of any of themoneys, goods, chattels, or effects of the insolvent (Sections 37and 38).

Disposal of the Debtors Property

The sale of the debtors property generates the proceeds that are

used to pay the creditors. The Insolvency Law allows for sale of propertyby public auction (the default rule) and under certain circumstances byprivate sale or in an expedited manner. Further, the Insolvency Lawallows the assignee to transfer receivables of the debtor to third partieswhere an attempt at collection by the assignee would not be in the interestof creditors. These procedures are discussed in more detail below.

Sale by Public Auction

To make the liquidation proceedings as transparent and as graft-

free as possible, the Insolvency Law requires that the assignee to sell theassets of the insolvent estate via public auction.31 The notice andadvertising requirements for such sale are those required by Section 15 ofRule 39 of the 1997 Rules of Civil Procedure.32 Although, the InsolvencyLaw does not appear to require prior court approval for such offering,several practitioners and court have followed this practice. For reference,see Sample Forms 19 and 20 (Motion for the Sale of a certain property ofthe insolvent estate via public auction, and the corresponding Orderauthorizing the said sale).

31Ibid., Sec. 36(4).32 Section 36(4) of the Insolvency Law, requires the advertisement of the public auction tobe made pursuant to subsections (1), (2), and (3) of Section 454 of the Code of CivilProcedure. Section 454 has been replaced by Sections (15) (a) (b) (c) and (d) of Rule 39of the 1997 Rules of Civil Procedure.


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Sale of Property by Private Negotiation

There may be instances, however, when private sale may prove tobe more beneficial to the insolvents estate. In such cases, the Insolvency

Law allows the assignee to file a petition in writing setting forth the factsshowing the sale to be necessary.33

Upon the filing of the petition, notice of the hearing thereof of atleast ten (10) days shall be given by publication and mailing. If it appearsafter hearing that a private sale is for the best interests of the estate, thecourt may authorize the sale.34

For reference, see Sample Forms 21 and 22 (a petition for privatesale of property and the corresponding court order granting the same).

Sales Procedures when Property is Perishable

The Insolvency Law also contemplates expedited sales of propertyunder specific conditions:

In all cases when it appears to the satisfaction of the court that theestate of the debtor, or any part thereof, is of a perishable nature,or is liable to deteriorate in value, or is disproportionatelyexpensive to keep, and that the insolvents estate will suffer ifsufficient time elapses for the giving of notice, the court may orderthe same to be sold in such manner and at such time as may be

deemed most expedient, under the direction of the sheriff, receiveror assignee, as the case may be. . . 35

Since in such cases, it is the Sheriff, Receiver or assignee that haspersonal knowledge of the condition of the estate or any part thereof, theSheriff, Receiver or Assignee/ Liquidator should be the one to inform thecourt of the perishable nature of the asset and move for the immediatesale of the property identified as perishable. Creditors, however, arecertainly entitled to seek such sales, as well.

In these cases, the notice requirements of Rule 39 of the Rules of

Civil Procedure may be relaxed if the time required by such may result in aproperty perishing to the detriment of the estate.

33Ibid., Sec. 39.34Ibid.35Ibid., Sec. 40.


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For reference, see Sample Forms 23 and 24 (an Ex-Parte Motion tosell perishable property filed by the assignee and the order approving thesame).

Assignment of Outstanding Debts due Estate

There may be instances when outstanding debts, or other propertydue or belonging to the estate (i.e., receivables) x x x cannot be collectedand received by the assignee without unreasonable or inconvenient delayor expense. In those instances, the receivable or property may be soldand assigned to third parties with the approval of the court. In caseswhere there are rights of action for damages in favor of the insolvent priorto the commencement of the insolvency proceedings, the same may,(also) with the approval of the court, be compromised.36

For reference, see Sample Forms 25 and 26 (an Ex-Parte motion toauthorize the assignment of outstanding debt, and the order granting thesame).

Prioritization and Payment of Creditors

By its very name, an insolvency proceeding contemplates asituation where the proceeds from the sale of the debtors assets areinsufficient to pay all the creditors in full. This means that the law

determines how the proceeds should be divided amongst the creditors.

The Insolvency Law established a scheme for classifying andprioritizing creditors.37 However, this arrangement was superceded by theprovisions on concurrence and preference of credits in the Civil Codewhen it was passed in 1949.

As discussed below, the Civil Code addresses the rights of securedand unsecured creditors.

Rights of Secured Creditors under the Civil Code

Article 2241 of the Civil Code recognizes numerous types of lienson specific personal property, including tax liens, mortgages, claims for

36Ibid., Sec. 41.37Ibid., Secs. 49 and 50.


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misappropriation of the property, claims for the purchase price for theproperty, hotelkeepers liens, claims for transportation, salvage and repairof the property, and crop liens.

Article 2242 recognizes various types of liens on specificimmovable property and real rights of the debtor, including tax liens,mortgages, mechanics liens, and judgment liens.

Proceeds from the sale of property securing claims go to the lienholders of the particular property that has been sold. Proceeds remainingafter these payments go to the unsecured creditors. When the salesproceeds of a particular property are insufficient to satisfy all the securedclaims there against, the assignee must pay any taxes assessed on theproperty. The other lien holders share the remaining proceeds pro rata.38

Rights of Unsecured Creditors Under the Civil Code

With respect to unencumbered property of the debtor, as well assurplus proceeds after the sale of encumbered property, Article 2244 ofthe Civil Code prioritizes the claims of unsecured creditors, ranking themas follows.

(1) Proper funeral expenses for the debtor, or children under hisor her parental authority who have no property of their own,when approved by the court;

(2) Credits for services rendered the insolvent by employees,laborers, or household helpers for one year preceding thecommencement of the proceedings in insolvency (but seeLabor Code provisions, below);

(3) Expenses during the last illness of the debtor or of his or herspouse and children under his or her parental authority, ifthey have no property of their own;

(4) Compensation due the laborers or their dependents underlaws providing for indemnity for damages in cases of laboraccident, or illness resulting from the nature of theemployment;

38 Civil Code, arts. 2246-50.


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(5) Credits and advancements made to the debtor for support ofhimself or herself, and family, during the last year precedingthe insolvency;

(6) Support during the insolvency proceedings, and for threemonths thereafter;

(7) Fines and civil indemnification arising from a criminaloffense;

(8) Legal expenses, and expenses incurred in the administrationof the insolvent's estate for the common interest of thecreditors, when properly authorized and approved by thecourt;

(9) Taxes and assessments due the national government, other

than those mentioned in articles 2241, No. 1, and 2242, No.1;

(10) Taxes and assessments due any province, other than thosereferred to in articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, otherthan those indicated in articles 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity orbeneficence;

(14) Credits which, without special privilege, appear in (a) apublic instrument; or (b) in a final judgment, if they havebeen the subject of litigation.

These credits shall have preference among themselves in the orderof priority of the dates of the instruments and of the judgments,respectively.

Unsecured claims falling outside one of the above classes do notenjoy a preference.39 They receive payment pro rata from remainingproceeds without reference to date of claim.40 Shareholders are then

39 Civil Code, art. 2245.40Ibid., art. 2251


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entitled to payment according to the Corporation Code if any proceedsremain.

Rights of Unsecured Creditors Under the Civil Code when the Debtor is aCorporation

Many of the unsecured claims described in the previous sectionpertain to circumstances where the debtor is an individual. The ranking ofunsecured creditors when the debtor is a corporation would be as follows:

(1) Credits for services rendered the insolvent by employees,laborers, or household helpers for one year preceding thecommencement of the proceedings in insolvency (but seeLabor Code provisions, below);

(2) Compensation due the laborers or their dependents underlaws providing for indemnity for damages in cases of laboraccident, or illness resulting from the nature of theemployment;

(3) Fines and civil indemnification arising from a criminaloffense;

(4) Legal expenses, and expenses incurred in the administrationof the insolvent's estate for the common interest of thecreditors, when properly authorized and approved by the

court;

(5) Taxes and assessments due the national government, otherthan those mentioned in articles 2241, No. 1, and 2242,No. 1;

(6) Taxes and assessments due any province, other than thosereferred to in articles 2241, No. 1, and 2242, No. 1;

(7) Taxes and assessments due any city or municipality, otherthan those indicated in articles 2241, No. 1, and 2242, No. 1;

(8) Damages for death or personal injuries caused by a quasi-delict;

(9) Gifts due to public and private institutions of charity orbeneficence;


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(10) Credits which, without special privilege, appear in (a) apublic instrument; or (b) in a final judgment, if they havebeen the subject of litigation.

Effect of Provisions in the Labor Code with respect to the Rights ofWorkers for Unpaid Wages

Passed in 1974, the Labor Code contains a provision that givesworkers a first preference with respect to unpaid wages and othermonetary claims.41 This has been the subject of several Supreme Courtdecisions, which are discussed in more detail in Part 5.

Account ing and Bookkeeping by the Assignee

The assignee is required to maintain regular records of moneysreceived and to allow creditors and other interested parties access theretoat all reasonable times.42

Thus, the assignee is required to file accounts within three (3)months and within one (1) year of his assumption to office, or periodicallyas the occasion calls for it. A final account must be filed prior to thesettlement of the estate.

The assignee is required to file just and true accounts of all his

receipts and payments with proper vouchers, verified by his oath, and astatement of the property outstanding, specifying the causes of its (being)outstanding, also what debts or claims are yet undetermined, and statingwhat sum remains in his possession. He shall also execute an affidavitstating that he has sent notices by registered mail to all identifiedcreditors. The court shall set the accounts for hearing within two (2) toeight (8) weeks from the filing thereof.43

For reference, see Sample Form 27, which is a Manifestation of theassignee informing the court of his filing of the final account, together withan Affidavit that the assignee has sent notices of hearing on the said final

account to all creditors who have proved their claims, that he will apply forsettlement of his account and for a discharge from all liability as assignee

41 Labor Code, art. 110.42 Insolvency Law, Sec. 3943Ibid., Sec. 43.


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at the time specified in such notice of hearing, which time should not beless than two (2) nor more than eight (8) weeks from the filing of his finalaccount with the court.44 See also Sample Form 28 (an Order setting thehearing on the final account).

In case the assignee fails to submit any of the required accountswithin the mandated period, the court may at any time, upon the motion ofany two or more creditors, require the assignee to file his account, andthe accounts shall be heard in the same manner as specified above. If theAssignee/ Liquidator has funds subject to distribution, he may (also) berequired to distribute them without delay.45 The assignees failure orrefusal to render accounts may give the court grounds to discharge himand appoint another in his stead.46

For reference, see Sample Forms 29 and 30 (an Ex-Parte motion

filed by at least two (2) creditors to require the assignee to file account,and the order approving the same).

Discharge of the Insolvent Debtor

Application, Determination, and Effect

The Insolvency Law explicitly states that there shall be nodischarge for corporations.47 Discharge applies only to individual debtors.

The insolvent debtor may apply for discharge from his debts at anytime after the expiration of three months from the adjudication of hisinsolvency, but not later than one year from such adjudication, unless theproperty of the insolvent has not been converted into money x x x. Thecourt shall thereupon order (that) notice be given to all creditors who haveproved their debts to appear on a day appointed for that purpose andshow cause why a discharge should not be granted to the debtor.48

The notice shall be given by registered mail and by publication atleast once a week, for six weeks, in a newspaper published in theprovince or city, or, if there be none, in a newspaper which, in the opinion

44Ibid., Sec. 47.45Ibid., Sec. 44.46Ibid., secs. 44 and 46.47Ibid., Sec. 52.48Ibid., Sec. 64.


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of the judge, will best give notice to the creditors of the said insolvent x xx. If no debts have been proven, such notice shall not be required.49

For reference, see Sample Forms 31 and 32 (an Application for

Discharge, and the Order setting the same for hearing).

If a debtor is entitled to a discharge, the court shall give the debtora certificate under the seal of the court, 50 an example of which isrepresented by Sample Form 32.

The discharge shall release the debtor from all claims, debts,liabilities, and demands set forth in (the) schedule, or which were or mighthave been proved against his estate in insolvency. (It shall also serve)as a complete bar to all suits brought on any such debts, claims, liabilities,or demands, and the certificate (of discharge) shall be prima facie

evidence in favor of such fact and of the regularity of such discharge.

51

The said bar notwithstanding, any interested party may, within one(1) year after the date of discharge, file an action to contest the validity ofthe discharge on the ground that the discharge was fraudulently obtainedand the fraud was discovered subsequent to the discharge.52

Limitations to Discharge

There are certain obligations of the debtor that are not released or

discharged in insolvency proceedings. Such obligations, among others,consist of taxes or assessments due the national government, or anyprovincial or municipal government; debt created by the fraud orembezzlement of the debtor or by his defalcation as a public officer orwhile acting in a fiduciary capacity.53

Although the law seems to be very liberal in favor of the insolventdebtor, there is actually a limit to the frequency of an insolvent individualspetition for relief under the provisions of the Insolvency Law. UnderSection 65of the law, one of the discharges that is considered invalid orlegally infirm is when an individual has previously received the benefit of a

49Ibid.50Ibid., Sec. 67.51Ibid., Sec. 69.52Ibid.53Ibid., Sec. 68


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discharge, and was again discharged within six (6) years next precedinghis application for a discharge.54 If that would be the case, the seconddischarge is legally infirm and should be invalidated and revoked.55

54 Only in case of voluntary insolvency.55 Insolvency Law, Sec. 65.


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Part 3: Time Periods

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Part 3: Time Periods Under the Insolvency Law

Voluntary Insolvency

A. Commencement phase up to Issuance of Order of Adjudication

Acts/Matters Involved Prescribed Time Period Comments/Remarks

Payment of filing fee of twenty-fourpesos by the debtor.

Upon commencement ofproceedings, i.e. upon filing ofthe petition (section 19 inrelation to section 76)

No comments.

Appointment of Receiver. Anytime from the time thepetition is filed to the time anAssignee is elected or

appointed. (section 78)

No comments.

Issuance of the Order ofAdjudication (containing mattersset forth in section 18).

Upon receipt of the petition.(section 18)

Although the Order ofAdjudication causes thestay of all civilproceedings by operationof law, it is recommendedthat the Order explicitlyinclude said stay as well,for clarity and betterunderstanding of allconcerned.

Publication of the Order ofAdjudication.

Immediately. (section 19) Publication is done in thenewspaper designated inthe Order, for the numberof times prescribedtherein. Necessarily, thelast publication should bemade before the date setfor the election of theAssignee. The debtormust also deposit costsfor publication of theorder and for service ofthe same to the creditors.

(section 19)


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Delivery to creditors of the Order ofAdjudication, by personal service

or registered mail.

The law uses the termforthwith.

The language of the lawshould be understood to

mean immediately, ascreditors shouldnecessarily be notifiedafter the issuance of theOrder of Adjudication andbefore the date set forthe election of theAssignee. (section 19)

B. From Issuance of Order of Adjudication up to Election of Assignee

Acts/Matters Involved Prescr ibed Time Period Comments

/RemarksSheriff to take custody of debtorsproperty, books, papers andeffects.

Period not set in the law. This should be doneimmediately since thesheriff takes this custodyprior to the appointmentof a receiver or Assignee.(section 18)

Deadline for filing of verifiedclaims by creditors.

At least two (2) days prior to thedate set for election of anAssignee (section 29).

No comments.

Deadline for filing of exceptions toclaims filed by creditors.

At least one (1) day prior to thedate set for election of anAssignee (section 29).

No comments.

Deadline for fixing of the value ofthe security of a secured creditor.

At least one (1) day prior to thedate set for election of anAssignee (section 29).

This allows the securedcreditor to vote in theelection of the Assignee.

Resolution of exceptions toclaims.

Before the election of anAssignee (section 29).

Exceptions are heard onaffidavit or otherevidence, in a summarymanner.

Note: The next phase commences from the election of an Assignee. This phaseproceeds in the same manner whether the action be one for voluntary orinvoluntary insolvency. Please refer to the section in this chart entitled BothVoluntary and Involuntary Insolvency.


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Involuntary Insolvency

A. Commencement Phase up to Issuance of Order of Adjudication

Acts/Matters Involved Prescribed Time Period Comments/

Remarks

Payment of filing fee. Upon commencement ofproceedings, i.e. upon the filingof the petition. (section 25 vis--vis section 76).

No amount is prescribedin the law.

Filing of bond by petitioningcreditors.

Upon commencement of theproceedings.

The bond is filed at thesame time as thepetition, is supported byat least two (2) suretiesand is conditioned onpayment to the

respondent Debtor if thepetition is dismissed orwithdrawn or therespondent Debtor is notfound insolvent.

(section 20).

Appointment of Receiver. May be done by the court uponthe filing of the petition or at anytime prior to theelection/appointment of anAssignee (section 78).

No comments.

Filing of additional bond bypetitioning creditors.

Upon motion (most probably ofthe respondent Debtor) andOrder of the Court (section 20).

No comments.

Issuance of Order to Debtor toShow Cause.

Upon the filing of the petition(section 21).

No comments.

Issuance of Order restrictingDebtors transactions over hisproperty.

Upon issuance of the Order toshow cause (section 21) orthereafter, after hearing (section21, with respect to 24).

Order forbids thepayment of any debts,the delivery of anyproperty belonging to theDebtor or to any personfor his benefit or thetransfer of any propertyby the Debtor.

Service to Respondent Debtor ofPetition and Order to show cause.

At least five (5) days before thedate fixed for the initial hearing(section 22).

If, for any reason serviceis not made, the ordermay be renewed and thetime and place ofhearing changed by


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supplemental order.(section 22).

Service by publication of Petitionand Order to show cause.

Law is silent on the period tomove for publication.

Grounds: (1) debtorresides outside of thePhilippines; (2) debtorhas departed from thePhilippines; (3) debtorcannot, after duediligence, be foundwithin the Philippines; (4)debtor conceals himselfto avoid service of theOrder to show cause; (5)debtor is a foreigncorporation with no

agent within thePhilippines (section 22).

Order directing sheriff to takepossession of property of anabsentee debtor.

Law is silent on the period tomove for the issuance of thisorder.

Grounds: (1) debtorresides outside of thePhilippines; (2) debtorhas departed from thePhilippines; (3) debtorcannot, after duediligence, be foundwithin the Philippines;(4) debtor concealshimself to avoid

service of the Order toshow cause; (5)debtor is a foreigncorporation with noagent within thePhilippines.

Requirements:affidavits requisite toprocure an order ofpublication in section22 (preceding cell)and presentation of a

bond in double theamount of theaggregate sum oftheir claims againstthe debtor (section26).

Sheriffs compliance with Order Upon receipt of the order. Duties of the sheriff


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issued under Section 26(preceding row).

under the order:

to take possessionof the property andeffects of the debtornot exempt fromexecution to an extentsufficient to cover theamount provided for

to prepare, within 3days from the takingof such possession, acomplete inventory ofproperty so taken andreturn it to the court

as soon as completed

to prepare, from thebooks and papers ofthe debtor, a scheduleof the names andaddresses of thecreditors, and theamount due each

to file the list ofcreditors andinventory of properties

with the clerk of court(section 26)

Filing of Answer to the Petition The Debtor answers at the timefixed for the hearing orimmediately after his demurrer isoverruled (section 23).

No comments.

Initial hearing on the Petition At a time and place to be fixedby the Court (section 21).

No comments.

Issuance of Order of Adjudication. If debtor defaults or if, after trial,issues are found in favor of the

petitioning creditors. (section 24).

Contents of the Order:

adjudges the debtoras insolvent from thetime petition was filed.

finds debtor guilty ofthe act/s of insolvencycharged in the


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B. From Issuance of Order of Adjudication up to Election of Assignee

Acts/Matters Involved Prescr ibed Time Period Comments/Remarks

Publication of the Order ofAdjudication.

Immediately. Publication is done in thenewspaper designated inthe Order, for the numberof times prescribedtherein. Necessarily, thelast publication should bemade before the date setfor the election of theAssignee. The debtormust also deposit costsfor publication of theorder and for service ofthe same to the creditors(section 25).

Sheriff to take possession of, andsafely keep, until the appointmentof the Receiver or Assignee, allthe property, papers and effects ofthe Debtor.

Period not set in the law. This should be doneimmediately since thesheriff takes possessionof the assets of theDebtor only until theappointment of aReceiver or Assignee.

Filing of verified schedule of debtsand liabilities and inventory ofassets by the Debtor.

Not to exceed three (3) daysfrom receipt by Debtor of theOrder of Adjudication (section24).

No comments.

Delivery by the clerk of court ofthe Order of Adjudication tocreditors of the Respondentdebtor based on the list ofcreditors appearing in the verifiedSchedule of Debts and Liabilitiesfiled by the Respondent Debtor.

Upon the filing, at any timebefore the date set for themeeting, of the Schedulesrequired of the Respondentdebtor (section 25).

If the verified Schedule ofDebts and Liabilities isnot filed by theRespondent debtor priorto the day fixed for theelection of the Assignee,the publication of theOrder of Adjudication isdeemed sufficient noticeto creditors of the timeand place for the electionof the Assignee (section

25).

Payment of publication expenses,necessary postage and the clerkof courts legal fee of ten centavosper copy of Order sent to creditorsof the Respondent debtor.

Before the entry of the Order ofAdjudication (section 25).

No comments.


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Deadline for filing of verifiedclaims by creditors.

Al least two (2) days prior to thetime appointed for the election

of the Assignee (section 29).

No comments.

Deadline for filing of exceptions toclaims of creditors.

At least one (1) day before thetime appointed for the electionof the Assignee (section 29).

No comments.

Deadline for fixing the value of thesecurity of a secured creditor toenable him to participate in theelection of the Assignee.

At least one (1) day before thetime appointed for the electionof the Assignee (section 29).

No comments.

Both Voluntary and Involuntary Insolvency

Note: All proceedings from the election of the Assignee proceed uniformlyfor voluntary and involuntary insolvency proceedings.

A. Election of Assignee, Qualification, and Transfer of Assets from theRespondent Debtor


Election of the Assignee. On the date set by the court, setforth in the Order ofAdjudication, which should notbe less than two (2) weeks, normore than eight (8) weeks fromthe date of the Order ofAdjudication (section 24).

An Assignee is electedby the concurrence of amajority of creditors innumber and amount.

Appointment of Assignee by thecourt.

Period not set in the law. Done by the court in thefollowing cases:

if, on the dayappointed for theelection of the

Assignee, creditors donot attend.

if, on the dayappointed for theelection of theAssignee, creditors failor refuse to elect an


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Assignee.

if, after election, theAssignee shall fail toqualify within theproper time.

if a vacancy occurs(section 31).

Assignee files a bond for thefaithful performance of his duties.

Within five (5) days from thedate of announcement of hiselection or appointment as such(section 30).

The court fixes theamount of the bond.

Issuance by clerk of court ofCertificate of Assignment in favorof the Assignee.

As soon as the Assignee iselected or appointed andqualified (section 32).

Effects of theAssignment:

relates back to thecommencement of theproceedings ininsolvency.

relates back to theacts on which theadjudication wasfounded.

vests title to all suchproperty, estate, andeffects in theassignee, although thesame is then attachedon mesne process.

vests in the assigneeall of the estate of theinsolvent debtor notexempt fromexecution.

dissolves any

attachment leviedwithin one (1) monthprior to thecommencement of theinsolvencyproceedings andvacates and setsaside any execution


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issued thereon.

vacates and setsaside any judgmententered by default orconsent of the debtorwithin thirty (30) daysprior to thecommencement of theinsolvencyproceedings.

B. Assignees actions Registration of Properties, Accounts, Composition


Registration of Assignment toAssignee.

Within one (1) month after themaking of the assignment tohim.

Accomplished in everyprovince or city whereany real estate owned bythe Respondent debtor issituated (section 34).

Preparation and filing of Scheduleof and Inventory.

Within one (1) month after hiselection.

This is done by theAssignee in cases where

the Respondent debtordid not file the Scheduleand Inventory. TheAssignee prepares theSchedule and Inventoryfrom the best informationhe can obtain. TheAssignee must furtherdeliver notice to allcreditors named in theSchedule who have notyet filed their claim(section 34).

Filing of accounts by theAssignee.

After three (3) months from theappointment of the Assignee orearlier as the court may direct(section 43).

No comments.


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Order, upon motion, requiringfiling of accounts and distribution

of funds.

At any time, upon the motion oftwo or more creditors.

No comments.

Hearing on the accounts filed bythe Assignee.

Within two (2) to eight (8) weeksfrom the filing of such accounts(section 43).

No comments.

Filing of final account by theAssignee.

Within one (1) year from thedate of the Order of Adjudication(section 43).

Extendible by the court,with notice to creditors.

Hearing on the discharge of theAssignee from all liability as suchAssignee after filing of final

account.

Within two (2) to eight (8) weeksfrom the filing of the finalaccount (section 47).

No comment.

Offering of terms of compositionby the Respondent debtor to hiscreditors.

After the Respondent debtor hasfiled in court his schedule of hisproperty and list of creditors.

No comments.

Filing of application forconfirmation of composition byRespondent debtor.

After

it has been accepted inwriting by a majority innumber of all creditors whoseclaims have been allowed anda majority in amount of such

claims; and

the consideration to be paidby the insolvent to hiscreditors and the moneynecessary to pay all debtswhich have priority and thecosts of proceedings havebeen deposited in such placeas shall be designated by andsubject to the order of thecourt.

The court conducts ahearing and confirms thecomposition if it issatisfied that: (a) it is forthe best interest of thecreditors; (b) theRespondent debtor has

not been guilty of anyacts or omissions whichwould bar his discharge;(c) the offer and itsacceptance are in goodfaith. Upon confirmationof a composition, theconsideration shall bedistributed as the judgeshall direct, the casedismissed, and title to theRespondent debtorsproperty shall revest inhim (section 63).


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Setting aside of confirmation ofcomposition.

At any time within six (6) monthsafter confirmation of the

composition (section 63).

Any party-in-interest mayapply for this remedy, to

set aside the confirmationand reinstate the case,by showing that fraudwas practiced in theprocuring of suchcomposition and thatknowledge thereof aroseafter confirmation of thecomposition.

C. Discharge of the Respondent Debtor note that this is not applicable tocorporations


Application for discharge by theRespondent debtor.

At any time after the expirationof three (3) months from theadjudication of insolvency, butnot later than one (1) year fromsuch adjudication (section 64).

No comments.

Filing of verified opposition to theApplication for Discharge.

The law does not state a period. This should necessarilybe filed before the

hearing on theapplication for discharge(section 66).

Hearing on the Application forDischarge.

To be scheduled by the judgeafter: (a) sending notice to allcreditors who have proved theirclaims; and (b) publication ofsaid notice at least once a week,for six (6) weeks, in anewspaper or publication in theprovince or city, or, if there benone, in a newspaper which, in

the opinion of the Judge, willbest give notice to the creditorsof the Respondent debtor(section 64).

No comments.


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Part 4: Numbers/Figures/Percentages

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Part 4: Numbers/Figures/Percentages/Data to Remember

Minimum amount of debt of the Petitioning Debtor in a Petition for

Voluntary Insolvency More than OneThousand Pesos (>P1,000.00) (Sec. 14, theInsolvency Law (IL).

Sheriffs fee for keeping the deeds, vouchers, books, properties of theinsolvent Debtor The same expenses andfees as would by law be collectible if theproperty had been levied upon and safely keptunder attachment (Secs. 18 and 24, IL).

Costs of filing Petitions for Voluntary Insolvency Filing fee of Twenty

Four Pesos (P24.00) plus the cost ofpublication of the Order adjudicating thePetitioning Debtor as insolvent, the cost ofmailing, plus the legal fee of the Clerk of Courtof Ten Centavos (P0.10) for each copy of theOrder delivered to creditors (Sec. 19, IL).Note, however, that in a petition for voluntaryinsolvency filed in Branch 161 of the RegionalTrial Court of Pasig City, the clerk of courtcharged the amount of Two Hundred TenPesos (P210.00) as filing fee for the petition.

Frequency of publication of the Court Order adjudicating Debtor asinsolvent As may be prescribed by the Court(Sec. 19, IL).

Minimum number of creditors required to file a Petition for InvoluntaryInsolvency Three (3) (Sec. 20, IL).

Minimum amount of debt in a Petition for Involuntary Insolvency OneThousand Pesos (P1,000.00) (Sec. 20, IL).

Minimum number of signatories to the verification in a Petition forInvoluntary Insolvency At least three (3), ifthere are more than three (3) petitioners (Sec.20, IL).

Number of Acts of Insolvency mentioned in the Insolvency Law Fourteen[one (1) mentioned in Sec. 14 re Petitions for


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Voluntary Insolvency, and thirteen (13)mentioned in Sec. 20, IL re Petitions forInvoluntary Insolvency].

Amount of bond to be posted by Petitioning Creditors for purposes of thePetition for Involuntary Insolvency As may beapproved by the Court in such penal sum asthe Court shall direct (Sec. 20, IL).

Minimum number of sureties required for posting of bond by PetitioningCreditors Two (2) (Sec. 20, IL).

Amount payable to Respondent Debtor if the Petition for InvoluntaryInsolvency is dismissed All costs, counselfees, expenses, and damages sustained by

reason of the proceedings (Sec. 23, IL).

Amount of bond of Assignee No specific amount is set by the law. Thecourt will have to fix it and the usual guidelineis reasonableness (Sec. 30, IL).

Amount of bond to be posted by the Petitioning Creditors who wish toattach certain properties of the RespondentDebtor Double the amount of the aggregatesum of their claims against the Debtor (Sec.26, IL).

Majority required in the election of Assignee Double majority, i.e.,majority in the number of creditors and majorityin the total amount of claims (Sec. 30, IL).

Liability for embezzlement The person who embezzles or disposes theproperty of the insolvent estate shall paydouble the value of the property embezzled ordisposed, to be recovered for the benefit of theinsolvents estate (Sec. 37, IL).

Penalties and forfeitures - The same penalties, forfeitures andproceedings by citation, examination andcommitment shall apply on behalf of anAssignee against persons suspected of havingconcealed, embezzled, conveyed away ordisposed of any property of the Debtor, or ofhaving possession or knowledge of any deeds,


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conveyances, bonds, contracts or otherwritings which relate to any interest of theDebtor in any real or personal estate (Sec. 38,IL)

Expenses of the Assignee All necessary expenses in the care,management and settlement of the estate(Sec. 42, IL).

Assignees commission Seven Percent (7%) for the first One ThousandPesos (P1,000.00); Five Percent (5%) for sumsexceeding One Thousand Pesos (P1,000.00)but not exceeding Ten Thousand Pesos(P10,000.00), and Four Percent (4%) for sumsexceeding Ten Thousand Pesos (P10,000.00),

based on all sums of money coming to (the)hands and accounted for by (the Assignee)(Sec. 42, IL).

Commission of Assignee if he was also the Receiver Any compensationallowed the Assignee as Receiver shall bededucted from the compensation to which theAssignee would be entitled (Sec. 42, IL).

Division of commission if there be two or more Assignees Court to Orderequitable division of the compensation of

Assignees (Sec. 42, IL).

Division of commission if there be a succession of Assignees if anAssignees term is not completed before thefinal settlement of the estate and a successoris appointed, the Court shall not allow to anysuccessor Assignee prior to the settlement ofthe estate an amount exceeding four percent(4%) of the sums of money coming into hishands (Sec. 42, IL).

Required supporting documents to accounts filed by the assignee (1)receipts and payments with proper vouchersverified by the assignees oath; (2) a statementof the property outstanding, specifying thecauses of its being outstanding; (3) astatement as to what debts or claims are yetundetermined and stating what sum remains in


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his possession; (4) affidavit that notice byregistered mail has been sent to creditorsnamed in the schedule filed by the debtor orthe assignee (Sec. 43, IL).

Minimum number of creditors for motions to require filing of accounts byassignee At least two (2) [Sec. 44, IL].

Exceptions to application of Insolvency Law.- Corporations principallyengaged in the banking business, or to anyother corporation as to which there is anyspecial provision of law for its liquidation incase of insolvency (Sec. 52, IL).

Majority required in the approval of composition Double majority, i.e.,

majority in the number of creditors and the totalamount of claims (Sec. 63, IL).

Number of publication of notice of application for discharge.- At least oncea week for six (6) weeks (Sec. 64, IL).

How often may an individual apply for discharge.- Not more often than six(6) years next preceding his application for adischarge (Sec. 65 (12), IL [in voluntaryinsolvency]).

Debts not released by discharge.- Tax or assessment due the nationalgovernment, or any provincial or municipalgovernment; debt created by the fraud orembezzlement of the debtor or by hisdefalcation as a public officer or while acting ina fiduciary capacity (Sec. 68, IL).

Effect of discharge.- (1) The discharge shall release the debtor from allclaims, debts, liabilities, and demands set forthin the schedule, or which were or might havebeen proved against the insolvent estate ininsolvency; (2) The discharge shall be acomplete bar to all suits brought on any suchdebts, claims, liabilities, or demands, and thecertificate of discharge shall be prima facieevidence in favor of the regularity of thedischarge (Sec. 69, IL).


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Time within which to contest the discharge.- Within one (1) year after thedate of discharge, on the ground that thedischarge was fraudulently obtained and thefraud was discovered subsequent to the

discharge (Sec. 69, IL).

Compensation of the receiver J ust compensation for his services and hisexpenses, including a reasonable attorneysfee, as may be fixed by the Court (Sec. 78, IL).


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Part 5: Insolvency Procedures in Question and AnswerForm

Jurisdiction and Powers of the Court

1. Do banks fall under the liquidation scheme established in theInsolvency Law?

No. Banks are specifically excluded by Section 52:

The provisions of this Act shall not apply to corporations engagedprincipally in the banking business, or to any other corporation asto which there is any special provision of law for its liquidation incase of insolvency.

2. Do insurance companies or cooperatives fall under the liquidationscheme established in the Insolvency Law?

No. The insolvency of insurance companies is governed by theInsurance Code (PD No. 1460 provisions in Title IV on Proceedings UponInsolvency of insurance companies specifically Sections 249, 250 and251).

The insolvency of cooperatives is governed by the CooperativeCode of the Philippines (RA 6938) specifically Part VI on Insolvency of

Cooperatives (Article 64) and Part VII on Dissolution of Cooperatives(Articles 65 to 71).

3. Does the court have jurisdict ion over suits filed by the insolventdebtor, i.e., collection of receivables?

The courts jurisdiction over adversarial actions involving theinsolvent debtor in insolvency is generally limited to cases or claims filedagainst the insolvent debtor itself. Cases filed by the insolvent debtoragainst third parties, i.e. collection of receivables, should be filed with the

regular courts in accordance with the applicable venue provisions underthe Rules of Court.56

56 It should be noted, however, that insolvency court, under Sections 36(7) and 41 of theInsolvency Law, retains approval power over compromises and settlements that theassignee enters into with the debtors debtors. In this sense, the insolvency court wouldbe involved in the collection actions of the assignee in other courts.


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43

4. Does the court have jurisdiction over the liquidation of apartnership?

Partnerships are subject to the provisions of the Insolvency Law

pursuant to Section 51. A partnership should come under liquidation in amanner similar to a corporation. The Supreme Court has recognized thatthe creditors should first go through the insolvency process before seekingrelief against any of the partnerships partners:

If a firm be insolvent, but one of more partners thereof aresolvent, the creditors may proceed both against the firm andagainst the solvent partner or partners, first exhausting the assetsof the firm before seizing the property of the partners. (TeckSeing & Co. v. Pacific Commercial Co., 45 Phil 142)

5. Does the court have jurisdiction over suits filed by theassignee/receiver to recover previous payments or conveyancesmade by the said debtor?

Yes, this is due to the in rem nature of the proceedings, which givesthe court jurisdiction over all assets of the debtor, wherever located.

6. What powers do the courts exercise in liquidation?

A court normally exercises a general, non-intrusive supervisory rolein liquidation. Generally, it is empowered to set aside the decision of theLiquidator if it is shown that it is not in the best interest of the creditorstaken as a whole.

Under the Insolvency Law, the specific powers of the Court are:

Under Section 18 on Voluntary Insolvency, the court approves theinsolvency petition and orders the election of an assignee.

Under Sections 20 to 28 on Involuntary Insolvency, the courtapproves the bond to be posted by the petitioning creditors;orders the debtor to answer the petition and file a Schedule ofDebts and Liabilities, as well as Inventory of assets; orders thepublication of his order; holds a hearing; orders or adjudicates thedebtor as an insolvent; and orders the sale of property of thedebtor to satisfy the claim of petitioning creditors.


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Under Sections 30 and 31 the court approves the election of anAssignee/ Liquidator, or appoints one in case of failure of electionor any vacancy.

Under Section 36(4) the court authorizes or approves the sale ofthe assets of the insolvent debtor.

Under Section 36(6) the court approves payment or settlement ofclaims of the creditors.

Under Sections 36(7) and 41 the court approves the compositionor compromise with the debtors of the insolvent debtor, or theassignment of receivables.

Under Section 39 the court approves the private sale of any

property of the estate.

Under Section 40 the court also approves the time and manner ofsale of perishable property of the debtor.

Under Section 42 the court approves the conversion (Section 39)or composition (Section 63) as well as administrative expenses ofthe Assignee/ Liquidator.

Under Sections 43 and 47, the court audits the periodic as well asfinal account report of the assignee.

Under Section 46, the court may discharge the assignee andreplace him for acts of failure, refusal or neglect. The court mayappoint a successor to the assignee in such cases as well.

Under Section 48, it is the duty of the court to order that propertyfound among the property of the insolvent, the ownership of whichhas not been conveyed to him by legal and irrevocable title, shallbe considered to be the property of other persons and shall beplaced at the disposal of its lawful owners. (Underscoring addedfor emphasis)

Under Section 63 the court approves the insolvents offer ofcomposition to his creditors.

Under Section 75 it is the duty of the Court x x x to exempt andset apart, for the use and the benefit of said insolvent, such realand personal property as is by law exempt from execution.


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Under Section 78 the court appoints a receiver whencircumstances warrant such action.

Initiating the Case

7. What bonds must creditors file in connection with their petition?

Under Section 20 of the Insolvency Law on Involuntary Insolvency,however, the petitioning creditors are required to post:

X x x a bond, approved by the court, with at least two sureties, insuch penal sum as the court shall direct, conditioned that if thepetition in insolvency be dismissed by the court, or withdrawn bythe petitioner, or if the debtor shall not be declared an insolvent,

the petitioners will pay to the debtor alleged in the petition to beinsolvent all costs, expenses, and damages occasioned by theproceedings in insolvency, together with a reasonable counsel feeto be fixed by the court.

Further, under Section 26 of the Insolvency Law on AbsenteeDebtors, the creditors may apply for a court order directing the sheriff totake into his custody a sufficient amount of property of the debtor tosatisfy the demands of the petitioning creditors and the costs of theproceedings. In such instances, the petitioning creditors are also requiredto post a bond in double the amount of the aggregate sum of their claimsagainst the debtor.

Under Section 27, the aforesaid bonds shall be conditioned that if,upon final hearing of the petition in insolvency, the court shall find in favorof the petitioners, such bonds and all of them shall be void; if the decisionbe in favor of the debtor, the proceedings shall be dismissed, and thedebtor, his heirs, administrators, executors, or assigns, shall be entitled torecover such sum of money as shall be sufficient to cover the damagessustained by him, not to exceed the amount of the respective bonds.

The Receiver

8. Are receivers appointed in every insolvency proceeding?

No. A receiver under the Insolvency Law may be appointed onlyunder limited circumstances. The party tasked with implementing theliquidation is an assignee.


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9. To what extent are insolvency receivers subject to regulationunder the general provisions regarding receivers in the Rules ofCourt?

Section 78 of the Insolvency Law provides that the appointment,oath, undertaking and powers of the receiver are governed by the generallaws applicable to receivers. In operational terms, these matters are setforth in Rule 59 of the Rules of Court. The grounds given in said rule forthe appointment of the receiver, however, should be deemed to besuperseded, at least in cases arising under the Insolvency Law, by thegrounds given in the Insolvency Law for the appointment of a receiver.

Under section 2 of Rule 59, the applicant is required to post a bond,in an amount fixed by the court. The application for a receiver may bedenied by the court, or may be discharged, upon the debtors filing of a

bond executed to the creditor who applied for the appointment of areceiver. The receiver may also be discharged if it is shown that hisappointment was obtained without sufficient cause.57

Before the receiver commences his work as such, he himself isrequired to post a bond and execute an oath that he will discharge hisduties faithfully and obey the orders of the court, under section 4 of thesame rule.

Under Rule 59, section 6, the receiver has the following powers:

to bring and defend, in such capacity, actions in his own name;

to take and keep possession of the property in controversy;

to receive rents;

to collect debts due to himself as receiver or to the fund, property,estate, person, or corporation of which he is the receiver;

to compound for and compromise [debts due to himself asreceiver or to the fund, property, estate, person or corporation of

which he is the receiver];

to make transfers;

to pay outstanding debts;

57 Rules of Court, rule 59, Sec. 3.


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to divide the money and other property that shall remain amongthe persons legally entitled to receive the same; and

generally to do such acts respecting the property as the court may

authorize

Under the Rules of Court, however, the receiver may not file ordefend any action for or against the receiver without leave of the court and(b) the funds in the hands of the receiver may be invested only by order ofthe court upon the written consent of all the parties to the action (Rule 59,Sec.6).

10. How is a receivership under the Insolvency Law terminated?

Under section 8 of Rule 59, receivership terminates whenever thecourt determines that the need for it no longer exists. Specifically, underthe Insolvency Law, receivership is terminated when the Assignee iselected/appointed. When the receivership is terminated, the receiver hasthe obligation to settle his accounts, and deliver all property pertaining tothe insolvent debtor to the Assignee.58

11. How is the compensation of a receiver established?

The compensation of the receiver is governed by the Insolvency

Law, under section 78. Such compensation allowed by the court shall bea just compensation for his services and his expenses, including areasonable attorneys fee.

12. What are the rules on the election or appointment of an assignee?

Under the Insolvency Law, the assignee may either be elected orappointed. Section 30 requires a double majority for the election of theassignee. This means that the Assignee/ Liquidator will be elected by amajority of the creditors who had proven their claims, such majority being

both in number and amount.

However, under Section 31, if the creditors did not attend thehearing set for the election of the assignee; or if they failed or refuse toelect an Assignee/ Liquidator; or after election the Assignee/ Liquidator

58 Insolvency Law, Sec. 78.


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fails to qualify within the proper time; or if a vacancy occurs by death orotherwise, the court shall appoint an assignee and fix the amount of hisbond. An assignee may also be appointed by the court under Section 46of the Insolvency Law, as a replacement for an assignee that has been

removed for acts of failure, refusal, or neglect.

13. Are bonds required to be posted by the assignee?

Yes. It is normal practice in various insolvency law systems torequire a liquidator to post a bond or insurance to guarantee theperformance of his duties in accordance with the statute.

Section 30 of the Insolvency Law requires the assignee to post:

X x x a bond in an amount to be fixed by the court, to theGovernment of the Philippine Islands, with two or more sufficientsureties, approved by the court, and conditioned upon the faithfulperformance of the duties devolving upon him x x x.

14. What is the nature of the assignment between the debtor and theassignee?

The Assignee, having been assigned the property of the debtor,holds it in trust for the benefit of the creditors. He thus has the general

duties of a trustee. As against the insolvent debtor, however, he isconsidered a special legal agent, whose possession of the insolventsestate is the same as that of the insolvent.59 In another case, theSupreme Court held that the Assignee takes the property in the sameplight and condition that the bankrupt held it. 60

It should be noted however, that there is jurisprudence to the effectthat an assignee may raise defenses against claims that may beunavailable to the insolvent debtor. In the cited case of Te Pate v.Ingersoll (43 Phil 394), the Assignee was held to be a stranger to anunregistered pledge executed by the insolvent debtor, by virtue of hisstatus as representative of all the creditors.

59Hunter, Kerr & Co. v. Murray, 48 Phil 499; reiterated in Castro v. Consuelo CarratalaVda. De Veloso.60Giberson v. A.N. Jureidini Bros., Inc., 44 Phil 216


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15. How much bond should be required to be posted by theAssignee?

No specific amount is required under the Insolvency Laws. The

amount is left to the discretion of the court and the usual guideline isreasonableness of the amount.

16. What are the powers and duties of the Assignee?

The assignee, having been assigned the property of the debtor,holds it in trust for the benefit of the creditors. He thus has the generalduties of a trustee.

Under the Insolvency Law, the powers and duties of an assignee

are found in Sections 32 to 34; 36 to 44; 47 and 63.

Under relevant jurisprudence:

An assignee can bring action for unpaid subscription:

The assignee in insolvency can maintain an action upon anyunpaid subscription in order to realize assets for the payment ofits debts. (Lumanlan v. Cura, 59 Phil 746 Citing Philippine TrustCo. v. Rivera, 44 Phil 469; underscoring added for emphasis).

An Assignee has the authority to bind and compromise:

Under statute authorizing the assignee to defend actionspending against the insolvent at the time of the adjudication inthe same manner and with like effect as it might have beendefended by the insolvent, the assignee has the power to makecompromise; and in the absence of collusion or breach of trust,his action will be binding. (Unson v. Smith, Bell & Co., 50 Phil654)

An Assignee is charged with ensuring that assets of debtor arepaid only to rightful claimants and in the order of paymentprovided by law:

X x x the Liquidator, as representative of the corporation, takescharge of its assets and liabilities for the benefit of the creditors.He is thus charged with insuring that the assets of thecorporation are paid only to rightful claimants and in the order ofpayment provided by law. (Pacific Banking Corp EmployeesOrg. v. CA, 242 SCRA 492; underscoring added for emphasis).


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An Assignee is the representative of both the insolvent and hiscreditors:

Responsive to the spirit underlying the Insolvency Law (Act No.1956) and pursuant to the provisions of Chapter V thereofrelative to the powers and duties of the assignee, this officerrepresents in a voluntary or involuntary insolvency proceedingboth the insolvent as well as all his creditors. (Castro v.Carratala Vda de Veloso, 62 Phil 667; reiterated in Velayo v.Shell Co., 100 Phil 186; underscoring added for emphasis)

An assignee can intervene in an estate proceeding, where thedebtor has an interest in the estate of the deceased. (Castro v.Carratala Vda de Veloso, 62 Phil 667; reiterated in Velayo v. ShellCo., 100 Phil 186)

An Assignee represents primarily the interest of the creditors:

Nor are we inclined to place a restrictive interpretation on thelanguage of section 33 of the Insolvency Law in view of the otherprovisions of the Insolvency Law which plainly indicate that theassignee represents primarily the interests of the creditors of theinsolvent in the liquidation of the latter's estate. (Te Pate v.Ingersoll, 43 Phil., 394.) He may therefore properly presentdefenses on behalf of the creditors which were not available tothe insolvent. (Central Azucarera De Tarlac v. De Leon &Fernandez, 62 Phil 49; underscoring added for emphasis).

The Assignee is also considered a special legal agent:

The assignee is in effect a special legal agent of the insolvent,and his possession of the insolvent estate is the possession ofhis legal principal. (Hunter, Kerr & Co. v. Murray, 48 Phil 499;Reiterated in George Castro v. Consuelo Carratala Viuda deVeloso; underscoring added for emphasis).

The Assignee steps into the shoes of the debtor:

The Assignee takes the property in the same plight andcondition that the bankrupt held it. (Giberson v. A.N. JureidiniBros, Inc. 44 Phil 216)

Actions must be initiated by Assignee, on behalf of creditors:

Settled is the rule that, after the election of an assignee and theassignment to him of all the properties of the insolvent, the title toall such properties shall, by operation of law, vest in him as of


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the date of the filing of the petition for insolvency. (Act No. 1656,sec. 32; O'Brien v. Del Rosario, 49 Phil., 657; Sun LifeAssurance Co. v. Ingersoll, 42 Phil., 331.; reiterated in Phil TrustCo v. PNB, 42 Phil 413) From then all actions to recover theestate, debts, and effects of the insolvent should be brought and

prosecuted by the assignee and not by the creditors. (Act No.1956, secs. 33 and 36, par. 1.) Moreover, plaintiffs' complaintpartakes of the nature of an action to nullify fraudulenttransactions provided for in section 70 of the Insolvency Law,and as such, should be prosecuted by the assignee inrepresentation of the general creditors. (Maceda v. Fernandez,72 Phil 261; citing Asia Banking Corporation v. Herridge, 45Phil., 577, 588.)

17. What are the assignees tasks in the verification, identification,gathering, collection and recovery of assets?

Under various sections of the Insolvency Law:

As soon as an Assignee is elected or appointed and qualified x xx all the real and personal property, estate and effects of the debtorshall be assigned and conveyed to him and such assignment shall vestin him the title to all such property, estate and effects by operation of law,retroactive to the commencement of the insolvency proceedings. Theassignment shall also dissolve any attachments levied within one monthprior to the commencement of action and vacat

Handbook on Liquidation

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Transcript of Handbook on Liquidation